Today’s Blog – Thursday 9th March 2017

Editorial

The Australian press is currently full of stories about that normally boring subject of “energy” – with concerns about the cost and even existence of short term gas supplies now being added to the well known electricity market woes.

Energy intensive manufacturers are publicly talking about being offered only ultra-high gas prices (the highest in the World?) of up to and even in excess of A$20/GJ.  Once businesses cut-back and start firing people – which seems distinctly possible – then Government intervention will become more and more likely.

The ability to do much in the short term is very limited.  It takes years to discover and develop new gas sources.  The likely fastest material source of new gas is from overseas – delivered to Australia via a floating storage and regasification unit (FSRU) located in an East Coast harbour.  This could be put in place in 18-24 months.  This concept was derided as “bizarre” less than a year ago at the annual APPEA conference.  The economic – and political – case for it has arguably now changed radically.  You read it here first!

Downstream energy company AGL is the leading public promoter of a FSRU business for Australia.  It has also been very vocal in recent days about imminent gas shortages.  Only just over a year ago AGL announced the sale of a meaty 254 PJ of gas to GLNG in Queensland.  AGL seems to be managing the media and the politicians well – prospering from the sale of gas exports whilst successfully pointing the finger at others – and pushing ahead on a potentially profitable new business line.

Commodity prices

Oil prices were hit hard overnight, with Brent down ~4.8% to US$53.15 and WTI down ~6.3% to US$50.24.  The crucial psychological price barrier of US$50 is close.

The main driver was of course the weekly “numbers” from the EIA’s inventory report.  These showed a large crude build of 8.2 mmbbls (and the market did not care that this was offset by a large product decline of 6.6 mmbbls of gasoline and 2.7 mmbbls of condensate). One factor contributing towards the large build – which is purely temporary – was the commencement of the foreshadowed sell-off of some of the strategic petroleum reserve (SPR).

Henry Hub was a beacon of bullish light in comparison – rising nearly 3% to US$2.91.

LNG and international gas

Saudi Arabia’s Energy Minister al-Falih, speaking at the CERA industry conference in Houston this week, noted that the Kingdom expected to “double” its gas production in coming years.  This is more important for crude markets rather than gas markets – as gas will increasingly substitute for burning crude for electricity generation – particularly in the hot summer months.

Moving to an ex-OPEC member, Indonesia is the latest to be talking about the complementarity of new solar developments with gas-fired generation (we noted that Shell’s CEO did so a few weeks ago in the context of Australia).  Indonesia has a strong incentive to develop such assets in its Eastern islands that currently burn a lot of diesel for electricity.

FSRU’s should fit well into the archipelago.  However, the pace of business in Indonesia is not necessarily quick, notwithstanding the strong fundamentals.

Company news – Central Petroleum (CTP)

CTP went into a trading halt this morning – due to a revised bid received from suitor Macquarie Bank (MQG) – the details are yet to emerge.  We expect CTP to be taken out by MQG in the next few months – but possibly with current Management being left in place.

MQG’s financial muscle will allow the more rapid development of CTP’s Northern Territory gas assets – and the sale of their output into the gas starved East Coast (see above!)  That story will resonate strongly with various stakeholders.  And as we previously speculated, an East Coast gas story would combine well with the partly MQG funded Western Australian E&P company Quadrant Energy when it comes to its IPO a year or so down the track.

Quote of the day

With North Korea firing off missiles, etc, at present, its good to come across some less serious foreign issues – as illustrated by the following recent quote from Mexico’s President Pena Nieto:

“We are currently working with four different companies in Mexico who manufacture ladders.  Trump says his wall will be 35-45 feet tall.  These ladder companies assure us they can make ladders that will extend as far as 70 feet. And if he wants to electrify that fence, then we’ll make the ladders out of wood. So, there’s no problem here.”

 

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